On March 1, 2011, Mattie Company Received an Order to Sell

question 17

Multiple Choice

On March 1, 2011, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2012. On March 1, 2011, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2012 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2011. The following spot exchange rates apply: $$\begin{array} { | l | c | } \hline \text { Date } & \text { Spot Rate } \\\hline \text { March 1, 2011 } & \$ 1.90 \\\hline \text { December 31, 2011 } & \$ 1.89 \\\hline \text { March 1, 2012 } & \$ 1.84 \\\hline\end{array}$$ Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803.
-What was the net impact on Mattie's 2012 income as a result of this fair value hedge of a firm commitment?

• A) $379,760.60 decrease.
• B) $8,360.60 increase.
• C) $8,360.60 decrease.
• D) $4,390.40 decrease.
• E) $379,760.60 increase.

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Definitions:

Income Statement

A financial statement that shows a company's revenues and expenses over a specific period of time, resulting in a net income or loss.

Salaries Expense

The total amount paid to employees for services rendered during a specific period, recorded as an expense in financial statements.

Salaries Payable

A liability account that records the amounts owed to employees for work performed but not yet paid.

Month-End Adjusting Entry

Journal entries made at the end of the reporting period to update the accounts for accurate financial reporting.